Pricing decisions in an experimental dynamic stochastic general equilibrium economy

C.N. Noussair, D. Pfajfar, J. Zsiros

Research output: Contribution to journalArticleScientificpeer-review

Abstract

We construct experimental economies, populated with human subjects, with a structure based on a nonlinear version of the New Keynesian dynamic stochastic general equilibrium (DSGE) model. We analyze the behavior of firms’ pricing decisions in four different experimental economies. We consider how well the experimental data conform to a number of accepted empirical stylized facts. Pricing patterns mostly conform to these patterns. Most price changes are positive, and inflation is strongly correlated with average magnitude, but not the frequency, of price changes. Prices are affected negatively by the productivity shock and positively by the output gap. Lagged real interest rate has a negative effect on prices, unless human subjects choose the interest rate, or firms sell perfect substitutes in the output market. There is inertia in price setting, firms integrate wage increases into their prices, and there is evidence of adaptive behavior in price-setting in our laboratory economy. The hazard function for price changes, however, is upward-sloping, in contrast to most empirical studies.
Original languageEnglish
Pages (from-to)188-202
JournalJournal of Economic Behavior & Organization
Volume109
DOIs
Publication statusPublished - Jan 2015

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Pricing decisions
Price changes
Dynamic stochastic general equilibrium
Price setting
Inertia
Wages
Empirical study
Dynamic stochastic general equilibrium model
Stylized facts
Substitute
Adaptive behavior
Hazard function
Interest rates
Inflation
New Keynesian
Output gap
Productivity shocks
Pricing

Keywords

  • experimental economics
  • DSGE economy
  • pricing behavior
  • menu costs

Cite this

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title = "Pricing decisions in an experimental dynamic stochastic general equilibrium economy",
abstract = "We construct experimental economies, populated with human subjects, with a structure based on a nonlinear version of the New Keynesian dynamic stochastic general equilibrium (DSGE) model. We analyze the behavior of firms’ pricing decisions in four different experimental economies. We consider how well the experimental data conform to a number of accepted empirical stylized facts. Pricing patterns mostly conform to these patterns. Most price changes are positive, and inflation is strongly correlated with average magnitude, but not the frequency, of price changes. Prices are affected negatively by the productivity shock and positively by the output gap. Lagged real interest rate has a negative effect on prices, unless human subjects choose the interest rate, or firms sell perfect substitutes in the output market. There is inertia in price setting, firms integrate wage increases into their prices, and there is evidence of adaptive behavior in price-setting in our laboratory economy. The hazard function for price changes, however, is upward-sloping, in contrast to most empirical studies.",
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Pricing decisions in an experimental dynamic stochastic general equilibrium economy. / Noussair, C.N.; Pfajfar, D.; Zsiros, J.

In: Journal of Economic Behavior & Organization, Vol. 109, 01.2015, p. 188-202.

Research output: Contribution to journalArticleScientificpeer-review

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